Nation’s High Court Upholds Patent Exhaustion for Method Patents

Yesterday, the U.S. Supreme Court unanimously reaffirmed the longstanding doctrine of exhaustion as it applies to method patents. LG Electronics (“LG”) argued before the Court that the doctrine did not apply to method patents and that the defendant Intel Corporation (“Intel”) was not authorized to sell components of a patented system that must be combined with additional components in order to practice the patented methods.

Writing for the majority, Justice Clarence Thomas stated, “[f]or over 150 years, this Court has applied the doctrine of patent exhaustion to limit the patent rights that survive the initial authorized sale of a patented item. The Court of Appeals for the Federal Circuit held that the doctrine does not apply to method patents at all and, in the alternative, that it does not apply here because the sales were not authorized by the license agreement. We disagree on both scores.”

The facts of the case were relatively straightforward. LG purchased computer technology patents and then turned around and licensed the patents to Intel. Intel manufactured and sold microprocessors and chipsets using the LG patents. LG sued Intel and some of its customers (including Quanta Computer, Inc.) for patent infringement, arguing that LG was entitled to royalties because the customers combined Intel’s microprocessors and chipsets with non-Intel products. However, a license agreement between LG and Intel did not restrict Intel’s right to sell its products to purchasers who intend to combine them with non-Intel parts. Intel was only required under a separate agreement to give its customers notice that LG had not licensed those customers to practice its patents. The Court noted that there was no allegation that Intel breached this agreement.

The Court, after giving a detailed history of the doctrine of patent exhaustion, found that nothing in its interpretation of exhaustion supported LG’s argument that method claims, as a category, are never exhaustible. A patented method may not be sold in the same was as an article or device, but methods nonetheless may be “embodied” in a product, the sale of which exhaust patents rights. The Court stated that eliminating exhaustion for method patents would seriously undermine the doctrine since patentees seeking to avoid exhaustion could draft their claims to describe a method rather than an apparatus.